Delaware is much more than just the “Diamond State”. When it comes to incorporating your business, it may just be a diamond in the rough. Let’s take a closer look at why Delaware incorporation is increasingly becoming a no-brainer for organizations across the country in a new series we’re calling All About It—where we dive deep into the topics that fascinate us the most!
The Early Days
Delaware is a bit of an oddball. It’s the second smallest state state in the union—comprised of just three counties. So, how is it that Delaware became the go-to state for American businesses to incorporate?
Let’s travel back in time for a second. It’s 1899. Larry King is a high school freshman and you’ve already died of typhoid fever. Good times.
New Jersey is turning heads in the tri-state area following the passage of laws designed to tempt businesses away from New York. A small group of entrepreneurial activists we’ll sarcastically call “Citizens for Ulterior Motives” is dead-set on ensuring Delaware follows suit. Their determination leads to the passage of the state’s 1899 General Corporation Law.
The new law opens the floodgates for a rush of businesses to plant their flags in Delaware soil, but not without the help of corporate representation firms managed by none other than our good friends at Citizens for Ulterior Motives.
A note on those “floodgates” as we fast forward to the present day. Part of the law’s success can be directly attributed to the fact that it clearly established itself as being the only way to incorporate a private business (excluding banks) in the state. This clear-cut exclusivity created an air-tight funnel through which to channel the flood of new business. It also ensured that businesses interested in reaping the benefits of Delaware incorporation couldn’t twist the laws in such a way that would allow them to escape paying what little taxes the state demanded; effectively saying “You want to play ball? Fine. But you’re in our park so you’ll play by our rules.”
Delaware’s new law placed a considerable amount of power into the hands of businesses incorporating in the state. This was quite refreshing given the legal limitations being enforced at the time. The law also allowed businesses the power to do businesses in any other state, territory, colony, or foreign country (this was not standard at the time). Companies were given the freedom to merge, as needed, and were allowed to hold stocks and bonds in other businesses. Importantly, the law also protected shareholders from liability (“except to the extent of the par value of their holdings“).
Looking back on things, it’s easy to see what made the new law so popular. Like the Garden State laws it was modeled after, Delaware’s General Corporation Law attracted businesses based on three key features: (1) forming a business was easy, (2) there were low corporate taxes, and (3) the state gave corporations a lot of power. So much power, in fact, that the state has had to rein it in several times since the law was enacted.
However, many of the changes made to Delaware’s corporate laws over the years have been in the interest of protecting officers and directors from liability. Several statutes and amendments have also passed in an effort to hold officers, directors, and trustees accountable to act in the interests of the company, its stakeholders, and customers over any opportunities for personal gain.
But tweaking the law has become common practice for the state—which, today, generates over 25% of its revenue from incorporating new businesses. Remember, these laws were born out of a desire to compete with enticing legislation in neighbor states and successful competition requires a willingness to adapt. Over the years, a bipartisan consensus to keep corporate laws current and competitive has been baked into Delaware’s political consciousness. A Revision Committee has met to draft and propose amendments to Delaware’s General Corporation Law on a nearly annual basis since the 1960’s.
Why it Matters Today
Taxes alone are not what draws a business into Delaware incorporation. One of the biggest reasons the state remains an attractive locale for incorporation is it’s legal structure. We already know the state keeps its General Corporate Law up to date by making annual tweaks through the Revision Committee. But Delaware also has a special court—”The Court of the Chancery”—comprised of the most highly-respected legal minds in the state. The Chancery is allowed to adjudicate corporate cases without a jury. This ensures that disputes are resolved quickly and expertly. Reducing the frequency of protracted legal battles is a huge draw for high-profile businesses.
Of course, we’ve got to mention some of the many ways incorporating in Delaware can benefit your board of directors…
- A businesses incorporating in Delaware can have as many board members as needed so long as the total number of members is included in its certificate of incorporation. No need to sweat if that number changes; amending the certificate is simple and straightforward. You can also have a single person serving as the entire board!
- Officers and directors aren’t required to provide their names or addresses on documents when incorporating, giving those who serve on high-profile boards the option to remain anonymous.
- There are also no residency requirements for the boards of companies incorporating in Delaware. This means one person can incorporate a private company in Delaware and serve as its sole board without ever setting foot in the state!
- Finally, a Delaware corporation’s board of directors is allowed set it’s own price on shares of stock it wishes to sell.
Check out the full list of benefits to incorporating in Delaware in our Fast Facts series. No time for the whole nine? You can skim the highlight reel in the slides below!